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IR335 Inland Revenue Employer's Guide - Part 3
Contents | Responsibilities | Records | Other Payments | Penalties | Special Workers
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Part 3 - Other Payments |
AllowancesBesides normal salaries and wages, you may make other payments to, or on behalf of, your workers. This part covers the most common of these, and explains the tax treatment for each.
| Allowances |
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Allowances can be taxable or tax free and are usually paid as a result of
- an industrial collective or agreement, or
- an agreement made between the employer and employees. This is commonly known as an in-house agreement.
Taxable allowances must have PAYE deducted, along with the employee's wages. If you do not do this, you could be liable for the PAYE that should have been deducted, as well as penalties. Include the total taxable allowances with your employees' gross wages amount on your IR 348 schedule.
Tax-free allowances are added to your employees' net wages - wages after PAYE - when you pay them. Show the total amount of tax-free allowances paid in your wage book.
You do not need to apply for IRD approval to pay tax-free allowances. Decide for yourself - using IRD guidelines - whether the allowance is tax-free or not. To help work this out we have set out the three types of allowances commonly paid. They are
The IRD issues binding rulings on which allowances may be paid tax free.
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Benefit allowances |
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Benefit allowances are payments made in addition to salary or wages, which benefit the employee. A benefit allowance is taxed with the employee's wages in the pay period it is paid.
Food or accommodation provided to employees may also be a benefit allowance. The taxable benefit is the difference between the market value of the benefit provided, and any amount the employee pays.
Add the taxable value of the benefit to the employee's wages each pay period, and deduct PAYE from the total.
Example
Market value of accommodation $ 150 per week
Less rent paid $ 90 per week
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Value to be added to wages and taxed $ 60 per week
If the employee paid no rent, the value to be taxed would be $150 per week.
Any allowance which you pay to an employee instead of providing them with accommodation is fully taxable.
| Reimbursing allowances |
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Reimbursing allowances are payments made to employees to compensate them for expenses they have had while doing their job - such as meal allowances, mileage allowances or tool money.
Reimbursing allowances are not taxable. However, if the payment is more than the employment-related expenses, the excess is taxable.
| Travelling allowances |
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A cash allowance paid to an employee for travel between home and work may be tax free. It is tax free if the amount paid reimburses an employee's additional transport costs and one or more of the following special circumstances exist
- The employee is working outside the normal hours of work (for example, overtime, shift or weekend work).
- The employee needs to transport work-related tools and equipment - for example, the employee normally takes the bus to work but has to use some other type of transport in order to carry work-related gear.
- There is a temporary change in workplace.
- The employee is travelling to fulfil an obligation for the employer.
- There is some other condition of the employee's job.
- There is no adequate public transport system serving the workplace.
For all the special circumstances above, except the lack of adequate public transport, the tax-free amount is the actual cost of travelling between home and work, less the employee's usual transport costs.
Example
*20 km @ 62 cents for each km $12.40
Less usual transport costs $ 6.00
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Additional transport costs $ 6.40
In this example $6.40 is payable tax-free. If more than this is paid the excess is taxable. Deduct PAYE from any excess amount along with the employee's salary or wages.
For cases where there is no adequate public transport, the usual cost of travel between the employee's home and the place of work is set at $5 a day.
* Inland Revenue's mileage rates can be used if the actual cost per kilometre is not available. These are available on the IRD website
Example
20 km @ 62 cents for each km $12.40
Less set cost $ 5.00
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Additional transport costs $ 7.40
In this example $7.40 is payable tax-free. If more than this is paid, the excess is taxable. Deduct PAYE from any excess amount along with the employee's salary or wages
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| GST on allowances |
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You cannot claim a GST credit if the allowance is a general one that does not reimburse the employee's actual expenses incurred on your behalf, or if it is paid to meet the employee's private expenses.
| Lump sums |
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Lump sum payments which are paid as annual or special bonuses, retiring or redundancy payments, gratuities, or back pay are "extra emolument" payments.
There are two tax rates for lump sums, which are shown in the current tax tables. ACC earner premium is added to these rates, except for retiring or redundancy payments, which are not liable for ACC.
If your employee's annual salary or wages plus the lump sum will be more than $38,000, you must deduct tax at the high rate. This means that your employee will be less likely to have a large tax bill at the end of the year from an under-taxed lump sum payment.
Your employees can also elect to have any lump sums taxed at the high rate. They may choose to do this if for example, they have another job or other untaxed income such as rent. They will tell you if they want to use the high rate.
The PAYE deducted is paid with the other PAYE for the period in which the lump sum was paid.
If the lump sum is taxed using the low rate, tick the box on the Employer monthly schedule (IR 348) to show this.
Any lump sums paid regularly or any lump sums for overtime are not extra emolument payments. The lump sum amount is added to the employee's gross wages, and PAYE is deducted from the total using the PAYE tables.
If the employee uses an M SL, S SL or SH SL code, you will also have to deduct student loan repayments from lump sum payments.
Example
Chris has a student loan. He receives a Christmas bonus of $640 (gross). The PAYE, at the low lump sum rate of 22.4 cents in the dollar including earner premium, is $143.36 The student loan deduction is $64 (10 cents in the dollar).
The net bonus paid to Chris is:
Gross bonus $ 640.00
Less PAYE $ 143.36
Less student loan deductions $ 64.00
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Net bonus $ 432.64
Bonuses - annual or special
Bonus payments which you make irregularly, such as Christmas bonuses, are taxed at the lump sum rate (refer to the PAYE deduction
tables for the current lump sum rates).
If the employee uses an M SL, S SL or SH SL code, you will also have to deduct student loan repayments from the bonus.
Paying a net bonus
If you want to pay an employee a net bonus, you must calculate the gross amount to include in your wage records. The PAYE and any
student loan repayment calculated on the bonus must be paid in with other deductions for that pay period. The method for working out the gross bonus depends on the employee's tax code.
Example Ð M
The employee is to be paid a net bonus of $60. Here is how the gross bonus is worked out:
1. Deduct the lump sum PAYE rate from $1 ($ 1 Ð 22.4 cents) = 77.6 cents
2. Multiply the net payment by 100/ 77.6 cents ($ 60 x 100/ 77.6) = $ 77.32
3. The gross bonus is $ 77.32
To calculate the PAYE deductions, multiply the gross bonus by the lump sum rate
Gross bonus $ 77.32
Less PAYE deduction
(at 22.4 cents) $ 17.32
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Net bonus $ 60.00
Example - M SL
The employee's net bonus is $60.
1. Add the student loan rate (10 cents in the dollar) to the low lump sum rate (22.4 cents in the dollar).
2. Deduct this combined rate from $1. ($ 1 Ð 32.4 cents) = 67.6 cents
3. Multiply the net payment by 100/ 67.6 ($ 60 x 100/ 67.6) = $ 88.76
4. The gross bonus is $ 88.76
To calculate the deductions, multiply the gross bonus by the lump sum and student loan repayment rates
Gross bonus $ 88.76 Less PAYE deductions (at 22.4 cents) $ 19.88 Student loan repayments (at 10 cents)* $ 8.80 ------- Net bonus $ 60.08
* Student loan repayments are deducted at 10 cents in every whole dollar.
| Retiring and redundancy payments |
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Retiring allowances
A retiring allowance is a payment made to an employee on retirement. The employment must have been fully terminated. The employment may have been terminated because of
- the employee's decision, or
- the terms of any union contract, or
- the length of service of the employee, or
- the employer's policy.
It is not based on the age of the employee.
Retiring allowances are taxable in full, but are not liable for earner premium or residual claims levy. Refer to the PAYE tables for the current lump sum rates. See the notes on page 31 about when to deduct at a higher tax rate.
Example
Retiring payment $ 10,200.50
PAYE (on whole dollars)
at 33 cents in the dollar is* $ 3,366.00
* This example assumes that the employee is required to have tax deducted at the high lump sum rate.
Redundancy payments
A redundancy payment is different from a retiring allowance. The decision to terminate employment is the employer's. Redundancy payments may be made
- to an employee whose position is no longer needed, or
- to a seasonal worker whose usual seasonal position is no longer needed (the employee works for you each year for a continuous period of less than 12 months at a regular time each year).
The following are not redundancy payments, and are liable for earner premium and residual claims levy
- any payment made to an employee solely because of a seasonal layoff
- any payment made at the end of a fixed-term contract or a contract for a predetermined amount of work
- any payment made instead of giving an employee notice
- any payment of deferred wages made to an employee when finishing work (such as holiday pay, accrued bonuses and commissions)
- any payment by a company under its articles of association to any of its directors.
A severance payment may be a redundancy payment for tax purposes. A lump sum severance payment made to a permanent employee when a specific job or project is finished is a redundancy payment if the position of the employee has been fully terminated, and the position is no longer required by the employer.
If the employee stays with the same employer on another job or project, any payment is liable for earner premium and residual claims levy.
If the employee uses an M SL, S SL or SH SL code, you will also have to deduct student loan repayments from retiring and redundancy payments.
Termination of employment
To treat any payment as a retiring allowance or redundancy payment, the person's employment must have been terminated. If employment is not terminated the payment is liable for earner premium and residual claims levy.
Employment is not terminated if the employee:
- is still employed by a company which is at least 50% owned by the same shareholders, or is under the control of the same persons; or
- is still employed by the same employer, even if the employer's business has changed; or
- is still with the same business, even if the ownership of the business has changed; or
- has remained in substantially the same employment. This means if the employee continues to work under a contract of employment with substantially the same employer.
The following two types of payment are not retiring allowances or redundancy payments.
- Payments for accumulated annual leave, long service leave, and sick leave. These are payments which do not relate to retirement or redundancy.
- Payments made as a result of a merger, takeover, amalgamation or reconstruction between two parties if
- the employee is rehired by any party to the transaction within six months of termination of employment, and
- the employee's new job is substantially the same kind of employment they had before.
These payments are liable for earner premium and residual claims levy.
Note: "Substantially the same kind ofemployment" means doing the same type of work. This is based on such things as similarity of duties, similar conditions of employment, and a similar job description.
For example, if you rehire an employee to do most of the old duties but with slightly different salary and leave arrangements, the employment is "substantially the same kind". However, if you rehire the employee in a different area which needs new skills, it is not "substantially the same kind".
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| Bonuses - regular |
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Regular incentive or production bonuses Add these bonuses to wages for the pay periods in which they were earned. Use the PAYE tables to work out the PAYE. Remember that if the employee uses an M SL, S SL or SH SL code you must also deduct student loan repayments from the bonus. Use the student loan columns in the PAYE tables. The following notes refer only to PAYE, but the same method applies for employees with student loans.
Bonuses for one pay period
For bonuses relating to one pay period, add
the bonus to other wages for the pay period in which the bonus was earned. Deduct the PAYE from the total earnings.
Example
Ordinary wages for pay period $ 270.00
Bonus for same pay period $ 54.00
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Total earnings $ 324.00
Monthly bonuses - more than one pay
If you pay a monthly bonus relating to more than one pay period
- Add up the gross wages paid in the month.
- Add on the bonus and work out the PAYE (using the monthly tables) on the total.
- Work out the PAYE on the gross wages (excluding the bonus) for the month, and subtract this from the PAYE on the total calculated at step 2 above. This gives you the PAYE on the bonus.
Example
Margaret is paid weekly. She is given a monthly production bonus.
1. Add together the gross wages paid in that month: $222, $240, $276, $264 = $1,002.00 2. Add bonus $ 300.00
Total $1,302.00 3. Using monthly tables, calculate the PAYE on $1,302 $ 243.66 4. Deduct PAYE on $1,002 (M code) $ 176.71
The PAYE to be deducted from the bonus is $ 66.95
Use the same method if a bonus is paid fortnightly or four weekly. Use the fortnightly or four weekly tables to work out how much PAYE to deduct.
Include the PAYE on the bonus with the PAYE on the wages for the period in which the bonus was actually paid.
Bonuses covering more than one month
For a bonus which covers more than one month
- Divide the bonus by the number of months it covers. This gives you the monthly bonus amount.
- Add the monthly bonus to the normal pay for the month, and use the monthly PAYE tables to calculate the PAYE.
- Calculate the PAYE on the normal monthly pay and subtract this amount from the PAYE calculated at step 2 above. This gives you the PAYE on the monthly bonus.
- Multiply this by the number of months the bonus covers to get the total PAYE to be deducted from the bonus.
Example
Patrick gets a monthly salary of $1,120. He is paid a three-monthly incentive bonus of $720.
1. Monthly bonus is (1/ 3 of $720) $ 240.00
2. Add normal monthly pay $1,120.00 Total $1,360.00 Using monthly tables, the PAYE on $1,360 is $ 256.31
3. Deduct PAYE on $1,120 using the monthly tables $ 202.93 The difference is the PAYE payable on the bonus for one month $ 53.38
4. Multiply the one month's PAYE by three to get the PAYE on the bonus for three months (3 x $53.38) = $ 160.14
Deduct this amount from $720.
Include the PAYE on the bonus with the PAYE on the wages for the period in which the bonus was actually paid.
Bonuses for a broken period
If a bonus covers a broken period, such as when an employee leaves, treat the bonus as being for the whole of the pay period. Add the bonus to
wages in that pay period.
| Holiday pay |
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Include holiday pay and pay for statutory holidays as earnings in the period that you actually pay them. See the IRD PAYE deduction tables (IR 340) or (IR 341) for how to calculate your employees' holiday pay earnings. Before calculating your employees' holiday pay, please check your obligations under the Holidays Act 2003
FOR MORE HELP
The Department of Labour has a pamphlet called "Your holidays and other leave", which explains the rules for holiday pay. Contact the
Department of Labour's industrial relations Infoline 0800 800 863 if you would like further information about holiday pay or visit their website at
www.dol.govt.nz to request a copy of the pamphlet.
| Loss of earnings compensation |
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Loss of earnings compensation paid by your insurer to your employees is liable for PAYE. The insurer will deduct PAYE using the employee's tax code.
Similarly, if an injury occurs at work and you pay an employee for the period up until the time compensation is payable, you must deduct PAYE using the employee's tax code. This period will depend on the agreement you have with your insurer.
If you subsidise an employee who is receiving compensation, deduct PAYE on the extra payment you make using the secondary tax rates.
If you pay the employee salary or wages and your insurer subsequently reimburses you, deduct PAYE using the employee's tax code.
| Honoraria |
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For honoraria paid to employees, use the PAYE tables to work out the amount of PAYE tax.
Honoraria paid to mayors, chairpersons and/ or members of local bodies, clubs, societies and organisations are subject to withholding tax.
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Life insurance and personal accident premiums |
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Policies payable on maturity or surrender Examples of these policies are endowment or whole-of-life policies. If you pay the whole premium of the policy and all the proceeds of that policy will go to the employee, the premiums you pay are treated as salary or wages.
Include the gross premium with wages for the period in which the premium was paid to the insurance company.
If the proceeds of the policy are payable to the employer, the premiums are not taxable to the employee. Do not deduct PAYE.
Policies payable on accident or death only
There are various accident, temporary or term life insurance policies available on the market, and these can have different tax implications.
The premium the employer pays is not income to the employee, even if the benefits of the policy are payable to the employee. If the premium is for cover of work accidents, there is no PAYE or fringe benefit tax (FBT) liability. However, if the employer pays a premium for cover of non-work accidents the premium is not liable for PAYE, but is subject to FBT.
But, if an employee (or family member) takes out their own insurance and the employer pays the premium, the payments are treated as salary or wages. The employer does not pay FBT on these contributions.
| Prize money paid at sporting events and competitions |
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There is a legal requirement to deduct withholding tax on prize money at any sporting event or competition, not just professional events.
A prize money threshold of $500 has been set before a 20% withholding tax has to be deducted on the amount exceeding this threshold. This applies to each separate participant, for each separate event that the participant enters at the competition or sporting event.
Example 1
A doubles pairing in a tennis tournament win their division. First prize is $900. The prize
money is shared equallyÑ$ 450 each. Although the total prize money exceeds $500 the amount per person is under the $500 threshold so the payer does not have to deduct withholding tax.
Example 2
One of the tennis players from the doubles pairing also wins the singles title in her division. First prize was $700. The prize money is over
the $500 threshold so withholding tax must be deducted, but only from the portion that exceeds the threshold.
The total amount of withholding tax to be deducted is $200 x 20 cents = $40.
The player has won total prize money of $1,150. However, the threshold applies to each separate participant for each separate event.
You will need to get an IR 330 tax code declaration from the recipient of the prize money. They will use a WT tax code. If you do not receive a completed IR 330 or it is not fully completed deduct tax at the no-declaration rate (see page 8).
Include the gross and withholding tax on your Employer monthly schedule and show a WT tax code for the prize recipient.
Other sections of the IRD Employers Guide
Contents | Responsibilities |
Records | Other Payments | Penalties | Special Workers
